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Ind AS Conversion

The new leasing standard, Ind AS 116 Leases, has replaced the existing standard (Ind AS 17) from accounting periods beginning 1 April 2019. This standard is the Indian equivalent of the global standard IFRS 16, which has become effective for annual periods beginning on or after 1 January 2019. The new standard is expected to bring about a substantial change in lease accounting for lessees by replacing existing dual finance vs operating lease model with a “single accounting model for all leases” which recognizes leases in the balance sheet on day one, in the form of a right-of-use asset and a lease liability.

 

Welcome to Ind AS Conversion

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Globalization and liberalization have transformed the entire world into a global economic village. A number of multinational companies have already established their operations in emerging economies to drive growth, while entities in emerging economies are tapping global markets to fulfil their capital needs.

The use of different accounting frameworks in different countries can lead to confusion, bringing about inefficiency in capital markets across the world. Increasing complexity of business transactions and globalization of capital markets call for a single set of high quality accounting standards.

This has persuaded many countries to converge their national accounting standards with International Financial Reporting Standards (IFRS). India too made a commitment at the G20 summit held in 2009 for the convergence of Accounting Standards (AS) with IFRS.

On 16 February 2015, the Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 vide its G.S.R., laying down the roadmap for application of IFRS converged standards (Ind AS) to Indian companies other than banking companies, insurance companies and non-banking finance companies (NBFCs).

The new leasing standard, Ind AS 116 Leases, has replaced the existing standard (Ind AS 17) from accounting periods beginning 1 April 2019. This standard is the Indian equivalent of the global standard IFRS 16, which has become effective for annual periods beginning on or after 1 January 2019. The new standard is expected to bring about a substantial change in lease accounting for lessees by replacing existing dual finance vs operating lease model with a “single accounting model for all leases” which recognizes leases in the balance sheet on day one, in the form of a right-of-use asset and a lease liability.

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EY - Sandip

Sandip Khetan,
Partner and National Leader – FAAS

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EY - Transitioning to new leasing standard - Ind AS 116

Transitioning to new leasing standard - Ind AS 116

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EY - An insight into practical application experience of implementing Ind AS 115

An insight into practical application experience of implementing Ind AS 115

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EY - The new revenue recognition standard – Technology

The new revenue recognition standard – Technology

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EY - Sandip

Revenue reckoning: a transformational new standard

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EY - Applying Ind AS

Applying Ind AS

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EY - Are you ready to disclose the effect of adopting Ind AS 115?

Are you ready to disclose the effect of adopting Ind AS 115?

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EY Audit committee considerations for the new revenue standard

Audit committee considerations for the new revenue standard

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EY - Applying Ind AS 115 - Life Science entities

Applying Ind AS 115 - Life Science entities

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EY - Applying Ind AS 115 – Automotive: The new revenue recognition standard

Applying Ind AS 115 – Automotive: The new revenue recognition standard
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EY - Transitioning to new leasing standard – Ind AS 116

Transitioning to new leasing standard – Ind AS 116
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Applicability

On 16 February 2015, the MCA issued a notification announcing the Ind AS conversion roadmap for companies other than banking companies, insurance companies and NBFCs. The Roadmap suggests transition to the Ind AS framework in a phased manner.

The first phase covers companies with a net worth of more than INR500 crore. These companies will be mandatorily required to prepare Ind AS financial statements for the accounting periods beginning on or after 1 April 2016, with comparatives for the year ended 31 March 2016. All holding, subsidiary, joint venture and associate companies of such companies are also required to prepare Ind AS financial statements from 1 April 2016. Other specified companies will be required to comply in the subsequent years.

MCA Road Map

Net worth

  • Net worth shall be calculated as per standalone audited balance sheet of company as on 31 March 2014 or first audited financial statements for accounting period which ends after that date.
  • Net worth means paid-up Share Capital + all reserves created out of profits (excludes reserves created out of revaluation of assets, write-back of depreciation and amalgamation) + securities premium - accumulated losses - deferred expenditure and miscellaneous expenditure not written off.

Key differences between Indian GAAP and Ind AS in certain critical areas

There are many areas of differences between Indian GAAP and Ind AS because current Indian GAAP is driven by “form” rather than “substance” under Ind AS.

Certain critical areas that would have a transformational impact on the transition to Ind AS are as follows:

Financial instruments (Ind AS 109)

Extant Indian GAAP does not include mandatory guidance on accounting for financial instruments. Standards for accounting for financial instruments are used as a reference and have not been notified by the MCA. As per the existing roadmap, India will directly transition to Ind AS 109, ahead of the equivalent IFRS 9, which will be implemented in 2018 in other jurisdictions that have adopted IFRS or permit IFRS. Extant Indian GAAP in the area of accounting for financial instruments is mainly driven by “form”. Ind AS 109 would have a significant impact on the way financial assets and liabilities are classified and measured, resulting in volatility in profit or loss and equity. The new impairment model will have a significant impact on the systems and processes of entities due to its extensive requirements for data and calculation. Additionally, significant impact is anticipated in the areas of debt vs. equity classification, compound financial instruments, derivatives and hedging, and foreign currency convertible bonds.

Consolidated financial statements (Ind AS 110)

Ind AS 110 establishes a single control model for all entities (including special purpose entities, structured entities and variable interest entities). The implementation of this standard will require management to exercise significant judgment to determine which entities are controlled and are therefore required to be consolidated. This is a radical change in the Indian environment, because the new definition of “control” may change which entities are included within a group. This standard will be significant to companies that have complex holding structures and have formed special purpose vehicles.

Business combinations (Ind AS 103)

Under extant Indian GAAP, there is no comprehensive standard for business combinations. There are separate standards that deal with amalgamation, consolidation and assets acquisition. Ind AS 103 will apply to all business combinations, including amalgamations. Once Ind AS 103 is effective, all assets and liabilities acquired will be recognized at fair value. Additionally, contingent liabilities and intangible assets not recorded in the acquiree’s balance sheet are likely to be recorded in the acquirer’s balance sheet on the acquisition date. Goodwill on acquisition will not be amortized but may only be tested for impairment.

Revenue recognition (Ind AS 18)

Ind AS 18 provides for recognition of revenue from sale of goods when all the following conditions are satisfied:

  1. the entity has transferred the significant risks and rewards of ownership
  2. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold
  3. the amount of revenue can be measured reliably
  4. it is probable that the economic benefits associated with the transaction will flow to the entity
  5. the costs incurred or to be incurred can be measured reliably

AS 9 provides for recognition of revenue when all significant risks and rewards of ownership are transferred to the buyer and no significant uncertainty exists regarding the amount of consideration that is derived from the sale of goods . Thus Ind AS 18 provides for additional condition to be fulfilled for recognition of revenue

Ind AS 18 specifically deals with the exchange of goods and services with goods and services of similar and dissimilar nature. In this regard, specific guidance is given regarding barter transactions involving advertising services. This aspect is not dealt with in the existing AS 9. Ind AS 18 requires recognition of revenue using percentage of completion method only and further requires interest to be recognized using effective interest rate method.

Share-based payments (Ind AS 102)

Under Ind AS, employee share-based payments should be accounted for using the fair value method. Only in extremely rare circumstances is an entity permitted to measure equity instruments at their intrinsic value. Indian GAAP permits an option of using either the intrinsic value method or the fair value method. However, the entity using the intrinsic value method is required to give fair value disclosures.

In case of graded vesting, Ind AS 102 requires an entity to determine the vesting period for each portion of the option separately, and amortize the compensation cost of each such portion on a straight-line basis over the vesting period of that portion. The option to recognize the expense over the service period for the entire award period is not available.

Under Indian GAAP, the ICAI GN provides the following two options in this regard:

  • Determine the vesting period for each portion of the option separately, and amortize the compensation cost of each such portion on a straight-line basis over the vesting period of that portion.
  • The amount of employee compensation cost is accounted for and amortized on a straight-line basis over the aggregate vesting period of the entire option (i.e., over the vesting period of the last separately vesting portion of the option). However, the amount of employee compensation cost recognized at any date should at least equal the fair value or the intrinsic value, as the case may be, of the vested portion of the option at that date.

Presentation and disclosures (Ind AS 1)

An entity’s first Ind AS financial statements should include at least three balance sheets, two statements of profit and loss, two statements of cash flows and two statements of changes in equity and related notes. The first Ind AS financial statements should be presented in accordance with the presentation and disclosure requirements in Ind AS 1 Presentation of Financial Statements and other Ind AS. In addition, the presentation and disclosures in the financial statements should also comply with Schedule III of the Companies Act, 2013. Ind AS 101 does not provide exemptions from presentation and disclosure requirements in other Ind AS.

Explanation of transition to Ind AS

A first-time adopter should explain how the transition from Indian GAAP to Ind AS affected its reported financial position, financial performance and cash flows. These disclosures are required because they will help the users understand the effect and implications of the transition to Ind AS and how they need to change their analytical models to make the best use of the information presented using Ind AS.

Considering these GAAP differences, transition to Ind AS was expected to be a challenging affair for Indian companies. Additionally, changes in the standards by the MCA after due notification (Ind AS 115 was omitted and Ind AS 18 and Ind AS 11 were made applicable) also compounded the problem for the companies. SEBI pre-empted the situation and extended the timelines for the submission of financial results.

Revenue from contracts with customers (Ind AS 115 )

The new revenue recognition standard was notified by MCA on 1 April 2018 and radically changed the financial reporting in certain sectors. The standard has implications on the measurement, recognition and disclosure of revenue, which is typically an entity‘s most important financial performance indicator. It is the indicator most closely scrutinized by investors and analysts. Gaining an understanding of the effects of the new standard, providing early communication to stakeholders and advanced planning is critical for a successful implementation. With the new standard applicable to virtually all entities, it is not surprising that changes to the accounting for revenue affect multiple business functions outside of the finance department, including IT, legal, sales, marketing, human resources, investor relations and senior management. Some of the sectors that have been impacted include Technology, Aviation, Infrastructure, Telecom and e-commerce.


EY - Are you ready to disclose the effect of adopting Ind AS 115?

Are you ready to disclose the effect of adopting Ind AS 115?

Download PDF


EY - Sandip

Revenue reckoning: a transformational new standard

Download PDF


EY - Applying Ind AS

Applying Ind AS

Download PDF

 


EY - Audit committee considerations for the new revenue standard

Audit committee considerations for the new revenue standard

Download PDF


EY - Applying Ind AS 115 - Life Science entities

Applying Ind AS 115 - Life Science entities

Download PDF


EY - Applying Ind AS 115 – Automotive: The new revenue recognition standard

Applying Ind AS 115 – Automotive: The new revenue recognition standard

Download PDF

Is Ind AS the same as the IFRS issued by IASB?

Ind AS is not the same as IFRS. It is a separate accounting framework based on IFRS as created by the MCA and has certain carve-outs to accommodate Indian business nuances.

The following are some of the key carve-outs in Ind AS vis-à-vis IFRS as issued by IASB:

Previous GAAP

IFRS 1 defines the previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS. However, Ind AS 101 defines the previous GAAP as the basis of accounting that a first-time adopter used for its reporting requirement in India immediately before adopting Ind AS. The change makes it mandatory for Indian entities to consider the financial statements prepared in accordance with existing notified Indian accounting standards as were applicable to them as previous GAAP when they transition to Ind AS.

Property, plant and equipment

Ind AS permits (subject to limited exceptions around change in functional currency) an entity to use carrying values of all property, plant and equipment as on the date of transition to Ind AS, in accordance with the previous GAAP, as an acceptable starting point under Ind AS. IFRS does not provide a similar option on first-time adoption.

Straight lining of lease rentals

Keeping in mind the Indian inflationary situation, Ind AS states that the straight lining of lease rentals may not be required in cases where periodic rent escalation is due to inflation. IFRS does not provide an exception to straight lining of lease rentals where rent escalation is due to inflation.

Foreign exchange fluctuations

Ind AS provides an option to continue with the policy adopted for accounting for exchange differences arising from the translation of long-term foreign currency monetary items recognized in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP. Under IFRS, such exchange difference is charged to the income statement.

Foreign currency convertible bonds (FCCB)

Ind AS states that where the exercise price for the conversion of the FCCB is fixed, irrespective of any currency, it is to be classified as equity rather than as an embedded derivative. IFRS, on the other hand, requires that where the conversion of bond into equity shares is fixed but the exercise price for such conversion is defined in currency other than the functional currency of the entity, the conversion aspect be accounted as embedded derivative.

Bargain purchase gain

IFRS 3 requires bargain purchase gain arising on business combination to be recognized in profit or loss. Ind AS 103 requires it to be recognized as other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for classifying the business combination as a bargain purchase. In this case, it is to be recognized directly in equity as capital reserve.

Consequent to the changes made in Ind AS 1, it has been provided in the definition of “events after the reporting period” that in case of breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, if the lender, before the approval of the financial statements for issue, agrees to waive the breach, it shall be considered as an adjusting event. Under IFRS, these breaches will result in classification of loan as current instead of non-current.

Transition to Ind AS is not just an “accounting change”

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